Short-Term Debt Market’s Anxiety Spikes

The U.S. Treasury auctioned off short-term debt Tuesday morning, three- and six-month bills. The auctions saw weak demand, signifying some hesitancy on the part of investors to lend the U.S. government money while it’s mired in a caustic budget fight, with the threat of a default looming.

The three-month bills sold with a yield of 0.13%, while existing bills had yields of 0.099%. That effectively means very little. In terms of a funding issue for the government, it’s a negligible difference. But it shows the government had to “pay up” to move the debt. This isn’t the screaming, 1,000-point drop in the Dow that would be a clear message from Wall Street to Washington. But it’s a sign that the markets are at least entertaining the possibility that Washington could trip a default.

As these two charts illustrate, short-term debt investors are showing heightened anxiety, which is leading to weak demand. There are two more auctions on Wednesday that will also be closely watched (assuming there’s no deal before then).

Elsewhere in the capital markets, you’re starting to see some signs of strain as well. The yield on the 10-year Treasury note still isn’t moving much, at 2.72%, but stocks have turned lower. The Dow was down as much as 130 points after word started leaking out of the Senate that negotiations have stalled.

“Washington Follies are wearing thin on markets,” UBS’s Art Cashin wrote in an afternoon note. “Last night’s assumed Senate deal now has a possible competitor. Floor sense continues that a last minute can kick will get done.”

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